Abstract:

This study aims to find the relationship between economic freedom and the size of the shadow economy in 153 countries for the period between 1999 and 2013. Panel fixed effects (FEM) and panel random effects models (REM) are utilized based on the Hausman test results. Employment and economic freedom indicators are found to be in negative association with the size of the shadow economy. On the other hand, tax burden and employment positively affect the size of the shadow economy. The most effective freedom indicators on the shadow economy are overall economic freedom and business freedom, but the least effective is investment freedom.

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